Apps Are Not Coffee

from the advanced-economic-concepts dept

Jameson Ahern points us to a fantastic discussion by Josh Lehman, explaining why it's silly to argue that people are irrational for spending $4 or more on a cup of coffee*, but not $0.99 on digital content or apps. As with nearly all cases of seemingly "irrational" behavior in economics, the truth is that you just need to better understand the marginal benefit that people are getting and the true marginal costs, which often go way beyond the dollar amount. Lehman points out a few key examples, with the focus on trust & certainty, as well as the difference in the competitive market.

For the first point, he notes that you know exactly what you're getting with a Starbucks cup of coffee and how much you'll enjoy it:

I know I’ll like my cup of coffee. It will fully meet my expectations. For the $4 I spend I don’t expect it to change my life. I don’t expect it to even last beyond its last drop (and a trip to the bathroom later). It’s an experience I can fully trust will be pretty much the same each time. There’s no gamble here. Ask me if I’d like to drop $4 on a cup of your new “Instant Refresher Juice 1.0″ and there’s a very good chance I’ll pass. Or, maybe I’ll ask for a free sample to see if your $4 Instant Refresher Juice 1.0 is as good as Starbucks Coffee. In short, I know what I’m getting for $4 and I’m getting that same experience every time I hit the drive thru.

What he's really pointing out here is that there's a much bigger cost to your content than just the $0.99 it's being offered for. It's the risk of not getting any actual value out of it. And since people are, quite naturally, loss averse, they're much more hesitant to spend under such circumstances. This is completely rational behavior.

He also points out the general nature of the market, and whether or not there are reasonable "free" alternatives:

When you walk up to the counter of your local coffee shop you are not asked, “would you like a cup of our free coffee, or would you like to select from our paid options?”. If Starbucks gave out free coffee every day there would be mile-long lines at the drive thru. If the free coffee was anywhere close to as good as their paid stuff people would abandon the paid en masse. Some would pay maybe because they felt bad, as a freeloader. Others would pay because they preferred the options available to them in the paid column vs. the free. Now imagine the free selection at starbucks was nearly as large, or larger, than the paid selection: Welcome to the App Store.

In other words, as we've explained for years, the nature of the wider market really matters. In competitive markets, price gets driven down towards marginal cost. There are ways to prevent that -- and one is to build up brand value through things like trust and certainty (see the point above). So while there are cheaper alternatives, or even in many cases "free" alternatives at people's workplaces (contrary to Lehman's suggestion that there are no such alternatives), people still flock to the one they know and trust. But if there are lots and lots and lots of free alternatives, then you have to work much harder to justify the price. In some cases, for some people, you can. But the market situation between coffee and apps is not very close at all.

Lehman makes some other points as well, but the key one is that these are totally different markets with different factors playing on pricing. Comparing them in absolute dollar terms misses the full costs and full benefits associated with the purchase.

* Moreover, despite the "$4 coffee" being an oft-repeated trope about Starbucks, it's not really true. The biggest cup of coffee at Starbucks costs a little over $2. The drinks that are pricier than that are generally about nine-tenths milk, and milk is much more expensive than coffee. Indeed, the drinks that so many people think are a "ripoff" are not where Starbucks makes the majority of its money—they tend to be much lower-margin items than the plain coffee, because milk and whipped cream and fancy syrups are all high-cost and expensive to store. Is Starbucks still "expensive"? Maybe so -- but anyone who opens that discussion by talking about the "$4 cup of coffee" demonstrates a fundamental misunderstanding of how the business functions (and even of what's on the menu).

One thing I would like to add: there are tons of free apps that I wouldn't even bother to download and test. I have about 15 games on my Nexus - some from play store, some from indie bundle, but I play maybe 5 of them. It's not just free alternatives - you have to compete for very scarce user attention.

Many companies provide coffee in their break room for free, yet many workers will still hit up Starbucks (or Dunkin Donuts or Time Horton's or whatever) for a $4 coffee.
Hey guys... look! Starbucks is the perfect model of how a company can compete with free.

Oh I bought PowerAmp these days at Google Play. I had quite a few options out there that would do the basic job of playing mp3 (and flac that was my format of choice when looking for apps). Then I saw reviews about PowerAmp and decided to go through the trial.

After some thought (and after finding out I get it on all my devices with one purchase) I decided the $5 were worth the bought. It had a few extras I simply couldn't find in the free (or wannabe free) apps in the market. What's interesting is that DoubleTwist has a free version with extras on a paid one. Since I could not use its full capacity whatsoever it simply dropped out of my list. The same never happened with video players, the free one is the best and while I intend to donate I'll not be buying any other player anytime soon.

I do think $5 is a bit on the expensive side for an audio player. However I'm quite satisfied with my choice. Google play could have a longer return time period though just in case since there are things you find out just days after the purchase.

Oh and as for the coffee I have 3 places near my work that sell coffee and the free one inside my workplace. While I do have free coffee at least once a day I also pay for coffee every once in a while in the MOST EXPENSIVE place of the 3. Because it has the best coffee. Simple as that.

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To make the analogy less bad, the comparison should really be between someone that's never had Starbucks, or never had coffee, and someone buying an app. The marginal costs in that situation seem to be lined up better. I wonder how many more regulars the coffee shops would get if they offered a $0.99 demo?

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Some people like coffee more than others. I'm sure there is something absolutely stupid from others' perspective that you spend money on that matters to you. I have three sets of over the ear headphones. Waste of money? Yup. Do I care? No, I really enjoy experiencing different headphones.

Re: I bought a $5 app and loved it

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You make very valid and good points. Buying a cup of coffee has no string attached other then the side affects of the coffee which is why you buy it. If they some how restricted and limited the use of that coffee or made you pay more for it if you sipped it more then once every 5 minutes you would see a huge drop in coffee consumption.

Re: Probably

If coffee were like apps...

Sometimes I would buy the coffee and the following things would happen...

- I'd order an espresso, but I wouldn't be able to drink it right away, I'd have to wait 30 minutes whilst the barista proceeded to fill the cup with enough espresso for an extra-large cup. It would be my responsibility to provide the large cup for all the excess coffee. If I didn't have a large enough cup, the barista would throw the espresso away and then wait till I go purchase a larger cup and come back.

- Every now and then a coffee I had ordered would randomly be swiped away from the table I am sitting at. When I inquire as to why my coffee was taken away, I'd be told the barista did not have the rights to sell me that coffee and so I should pick another drink from the menu. I would be warned that any other drink I pick could also be taken away in the same fashion if the barista so felt like it.

- If I purchased a coffee in a ceramic mug for drinking-in, but then needed to leave before I finished, the barista would refuse to give me a paper cup, or allow me to use my own thermos. I'd be told I have to purchase another coffee in the correct coffee-rights-managed holder, which would allow me to enjoy my coffee outside the restaurant.

- Every now and then I'd enter the coffee house and I'd be told that there is no coffee available for my nationality... even though there are dozens of other people lined up and getting served. I could get served however if I go outside, then come back in wearing a different shirt or a hat - depending on what other nationalities were wearing that day.

- If I had bought a coffee but decided not to drink it and order water instead, there'd be no way for me to give that coffee to anyone else - literally the cup is registered to my lips only.

- If I brewed coffee at home and invited my friends around for free coffee... sometime during the evening CPAA (Coffee Police Ass. of America) agents accompanied by the FBI would smash down my door and arrest me and my friends drag us all off to a jail whilst the CPAA was allowed to search through my cupboards looking for evidence of coffee making equipment. I'd lose my friends, my job, my home. 10 months later the FBI would drop the case and the courts would rule that I did nothing wrong by sharing my coffee.

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If you offer a monopoly to Starbucks, 7-Eleven will be unhappy, but the break-room will just switch to tea.

People buy $4 coffee because of convenience and taste and those who don't care as much about taste will spend $2 for the convenience. Last time I checked, someone had to make the break-room coffee, and if you take the last bit and don't make a new pot, there will be hell to pay.

once, my department had a book club and the book was from some motivational speaker (I forget which, most of his stories were about him in hotels asking for ironing boards), and his mantra was to be exceptional, to give 150%. I disagreed - while being exceptional is a great thing to strive for - I think consistency is a far better way to retain clients.

McDonalds doesn't make the best food around but you can travel anywhere in the world and have a strong feeling of certainty what the food will taste like. In the same way with tech support - if you know that your request will be dealt with consistently in a reasonable time frame, that is better than going all out. If everyone gives 150%, then that defacto becomes 100%. It's the difference between maximum and optimum.

Hidden costs

A purchasing decision (even deciding to "purchase" something for $0.00) is a cost/benefit analysis. I think that things appear to be irrational when people, as they all too often do, only take the money into account in the "cost" column.

A latte at SB might cost me $4, but it also costs me the time & bother of going to the Starbucks, as well as the time to drink the coffee, and the time on the bathroom later.

An app might be free, but it still costs me time, bandwidth, memory space, and -- most importantly -- I take on some risk. Every time you install an app on your device, you are trusting the app's author not to do bad things (curated app stores do not change this need for trust).

Everyone's cost/benefit calculations are different, of course, but for mine -- a $4 cup of coffee is, sight unseen, a better deal than a free app once I factor in all of the pluses and minuses of each.

Re: Re: I bought a $5 app and loved it

About a year before buying it, I think maybe spring 2011?, I downloaded the free version and played with it. (And on a previous generation phone.)

Due to limitations, I quickly tired of it. Example: inability to save chord sequence. A better limitation might have been: ability to save only 3 chord sequences. Perhaps also limiting their overall length.

Played with it off and on. I could see the potential. I also considered writing my own. :-) But would have to explore some areas like the synthesizer, or whether I would have to generate raw sound.

By winter early 2012 I began thinking seriously of buying.

By spring I was convinced and bought it. Once I had the full version I immediately started having lots of fun with it. It was sort of like the real fun had been unlocked. The free version was not quite fun enough.

By fathers day I got a new phone. I was delighted that I could install the app on my new phone and gmail my entire chord database over to new phone. (By this time I had dozens of chord sequences, including a version numbering scheme.)

I am also very intrigued by the json format that individual sequences and the full database are exchanged in.

Other features that sold me were export to MIDI and WAV.

Sadly, it is difficult to find an app on Android that plays the WAV. An export to mp3 would have been much nicer -- but obviously more difficult as an encoder is needed. I haven't looked to see if there is anything built in (to the OS) or if there is an open source implementation in pure Java.

Other features I wish it had:
* export to mp3, obviously
* let you select your own chord inversion on an individual chord so that you can get a desired melody note. Maybe do this through the slash-chord feature. Have another button. Get two slashes like this: C/Am/C for C as top note, Am as chord, and C as bass note.
* shorter timing increment, such as 1/8 so that two 1/8 can fit into the time taken by 1/4. Also add, 3/8, 5/8.
* Now I'm going much further here, but don't marry together the synthesizer voice (eg, Piano) and template for how it is played (eg, Hammered, Chopper, Arp Up). Let me pick the combination of the two that I want.

I tend to go to Starbucks not only for the drinks, but also the social experience. The baristas all know me by name and know my drink. I get to spend 5 minutes of my morning socializing with someone who is not dropping paperwork on my desk, trying to stir up some office drama, or trying to use me as a scapegoat.

The caffeine is an added bonus... =P

I know, that's a sad look into my life where going to a Starbucks is highlight of my day. =P

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Tried PowerAmp a long time ago. Liked it. Still didn't buy it. I guess it was the fact that I could find a free player (MortPlayer) that I didn't like as well but could live with for my requirements. (Play a single folder or playlist, all night. Nothing more.)

I wasn't looking for much, so I found PowerAmp had a lot that I perceived I would be paying for, that I did not need. Like a gold plated steering wheel.

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4$ for coffee lol I'll stick to making my own coffee. Starbucks is alright but it's not worth 4$ to me. It's worth that to a lot of people and if it is I say buy it and enjoy it.

The app world is a tricky one especially when you have no idea if you're going to be paying 99 cents for total garbage. Some 99 cent apps are probably worth a lot more but it would be hard to survive in a market flooded by 99 cent garbage.

What is one of the best things about piracy? Well they're among some of the best unbiased sites to find shit that's actually pretty fucking nice and worth buying.

Some people surf top ten list on CNET that's based on who blew their ego the best but I'll still with warez forums to find the best.

Example Flame Painter one of the coolest apps and desktop programs I've used. I found it on a warez site I downloaded it and 30 minuets later I bought it because it's fucking pro.
Another Example Preset Viewer. "A standalone Photoshop preset manager for styles patterns brushes" This one I could not live without.

If you trust the people saying something is good give it a go I guess but if not I'd download it first pirated or not. If you can't find a pirated copy chances are it's not worth the time to crack.

Still on this? You do understand that marginal pricing does not work well in industries where the vast majority of costs are "up front" or before production, right?

You understand (because you learned this in school) that this model doesn't apply well in these cases, and many recommend not considering it.

Your "infinite" model that drives costs to zero also requires an effective infinite market place, which does not exist. Unless the product is a wear out and replace type thing, there is always a limit based on how many people would potentially want the product. Unless they are buying multiple copies and will continue to buy multiple copies int he future, then the market is limited and therefore not infinite.

There is a whole lot more there, let's just say that your explanation of the subject are rather simplistic, and address only one of the ways by which price is established. In a limited size marketplace, you cannot discount the requirement to recoup the fixed costs when selling the product. Failure to do so would make for a losing venture, which few people would willingly enter into (except maybe Step2).

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You know that people don't care what something costs to produce right? Either it's price is equal to or lower than its value (in which case they'll buy) or it isn't (in which case they won't).
If we're just talking about competing on price - which we were.
But again, 7 billion people on the planet, that's a long way towards infinity to me.